Editor's Note: To further improve the individual income tax (IIT) collection and administration system for the transfer of restricted shares, close loopholes in tax collection, and uphold tax fairness and order in the capital market, the Ministry of Finance, the State Taxation Administration, and the China Securities Regulatory Commission jointly issued the Announcement on Regulating the Individual Income Tax Policy for the Transfer of Listed Companies' Restricted Shares (Announcement No. 26 of 2026 of the Ministry of Finance, the State Taxation Administration, and the China Securities Regulatory Commission). The Announcement makes systematic adjustments to the taxable scope of restricted shares, cost recognition, and liquidation declaration, effectively addressing the shortcomings in the implementation of previous policies and profoundly impacting the reduction of holdings by individual shareholders, equity management of listed companies, and equity incentive arrangements of companies planning to go public. This article, by analyzing the differences between the old and new policies, systematically interprets the core changes of the new rules, estimates the tax burden impact, and provides targeted tax management recommendations for market participants.

I. Transition Between Old and New Policies: Core Changes in Individual Income Tax Policy on Restricted Share Transfers

Prior to the issuance of Announcement No. 26, the collection and administration of individual income tax (IIT) on the transfer of restricted shares of listed companies was primarily governed by the following documents: the Notice on Issues Concerning the Collection of Individual Income Tax on Income from the Transfer of Restricted Shares of Listed Companies (Caishui [2009] Document No. 167), the Supplementary Notice on Issues Concerning the Collection of Individual Income Tax on Income from the Transfer of Restricted Shares of Listed Companies (Caishui [2010] Document No. 70), and the Notice on Issues Concerning Individual Income Tax on the Transfer of Restricted Shares of Listed Companies After the Completion of Technical and Institutional Preparations by Securities Institutions (Caishui [2011] Document No. 108). Under these rules, income from the transfer of restricted shares was uniformly classified as "income from the transfer of property" and subject to IIT at a rate of 20%.

Document No. 167 defined the taxable scope of IIT on restricted share transfers as follows: First, restricted shares arising from the split-share structure reform, i.e., original non-tradable shares held by shareholders prior to the resumption of trading after the completion of the split-share structure reform, as well as bonus shares and stock dividends derived from such shares during the period from the resumption of trading to the lifting of the lock-up period. Second, restricted shares arising from new share issuances, i.e., restricted shares formed through initial public offerings (IPOs) after the "new-old demarcation" of the split-share structure reform in 2006, as well as bonus shares and stock dividends derived from such shares during the period from the listing date to the lifting of the lock-up period.

Depending on the status of the technical and institutional preparations of securities institutions, Document No. 167 provided for two differentiated withholding models:

For restricted shares formed before the completion of technical and institutional preparations by securities institutions, a model of "provisional withholding by securities institutions and self-declared settlement by taxpayers" was adopted. At the time of transfer, the securities institution would determine the original cost and reasonable taxes and fees of the restricted shares at 15% of the transfer proceeds, calculate the taxable amount as the balance after deducting the original cost and reasonable taxes and fees from the transfer proceeds, and provisionally withhold IIT at a rate of 20%. If the tax payable calculated by the taxpayer based on the actual transfer proceeds and actual costs differed from the provisionally withheld amount, the taxpayer was required to file a settlement with the tax authorities within three months starting from the first day of the month following the month of withholding. The tax authorities would then refund any excess or collect any shortfall after review. If the taxpayer failed to file the settlement within the prescribed period, the provisionally withheld tax would no longer be refundable and would be fully retained as tax revenue.

For restricted shares of newly listed companies formed after the completion of technical and institutional preparations by securities institutions, at the time of transfer, the taxable amount was calculated as the balance after deducting the cost original value already embedded in the settlement system and reasonable taxes and fees from the transfer proceeds, subject to a 20% tax rate, and the securities institution would directly withhold the tax. Document No. 108 (Caishui  supplemented the implementation of the second model: if a newly listed company, when applying for the initial registration of shares, was genuinely unable to provide cost original value information and an accompanying verification report, the cost original value and reasonable taxes and fees of the restricted shares would be deemed at 15% of the actual transfer proceeds.

Announcement No. 26 adjusts the original collection and administration rules from three perspectives—taxable scope, cost deduction, and settlement declaration—thereby achieving a comprehensive upgrade in the precise administration of IIT on restricted shares.

First, expansion of the taxable scope to close the loophole of tax avoidance through high stock dividends.

The new rules include bonus shares and stock dividends derived from restricted shares after the lifting of the lock-up period and registered with the securities depository after the implementation of the Announcement, within the taxable scope of IIT on restricted share transfers. Under the previous policy, only bonus shares and stock dividends derived before the lifting of the lock-up period were taxed, while those derived after the lock-up period had long been exempt from tax. In practice, some taxpayers sought to avoid tax by using high stock dividends after the lock-up period to dilute the per-share value and split the transfer proceeds. The new rules close this tax avoidance pathway.

Second, reshaping of the cost deduction rules and elimination of the 15% cost deemed method.

The new rules abolish the original method of deeming the cost original value and taxes and fees at 15% of the transfer proceeds, replacing it with a method based on the actual cost original value and reasonable taxes and fees. According to Announcement No. 26, the provisional withholding of IIT by securities institutions falls into two scenarios:

Scenario 1: If, after the implementation of the Announcement, a listed company applying for the initial registration of shares fails to declare the cost original value of the restricted shares as required, when an individual transfers the restricted shares, the securities institution shall calculate and provisionally withhold IIT based on the full amount of the transfer proceeds at a rate of 20%.

Scenario 2: If, before the implementation of the Announcement, a listed company had already completed the initial registration of shares without declaring the cost original value of the restricted shares, then after the implementation of the Announcement, when an individual transfers the restricted shares, the securities institution shall determine the cost original value and reasonable taxes and fees of the restricted shares at 15% of the transfer proceeds, calculate the balance, and provisionally withhold IIT accordingly. After the provisional withholding, the individual shareholder may file a settlement declaration in accordance with Article 3 of the Announcement, and the tax authorities will refund any excess or collect any shortfall based on the actual figures.

Third, unification of the settlement declaration timeline and standardization of the collection and administration process.

The new rules unify the settlement process and declaration timeline for restricted share transfers. After transferring restricted shares, an individual shall, by June 30 of the year following the transfer, submit to the competent tax authorities materials such as the cost original value of the restricted shares and file an annual settlement declaration. The tax authorities will then refund any excess or collect any shortfall based on the actual figures. The declaration process and timeline are now clearer and more standardized.

II. Background of the New Regulations

Documents Caishui Zi [1994] No. 40 and Caishui Zi [1998] No. 61 clearly stipulated that income from the transfer of listed companies' circulating shares by individuals is temporarily exempt from individual income tax. Following the completion of the split-share structure reform, the original non-tradable shares were converted into restricted tradable shares. The acquisition cost of such shares is far lower than that of circulating shares on the secondary market. If all income from their transfer were tax-exempt, it would result in significant tax inequity and exacerbate income distribution imbalances.

To address this, Document Caishui [2009] No. 167 specifically included the original non-tradable shares held by shareholders after the split-share structure reform and the restricted shares formed through initial public offerings within the scope of individual income tax, effectively regulating the tax order for restricted share transfers. However, limited by the tax collection and management conditions at the time, the old policy had regulatory loopholes: it only included bonus shares and stock dividends derived from restricted shares before the lifting of the lock-up period within the taxable scope, while shares formed through high stock dividends after the lock-up period were not subject to regulation. Meanwhile, Document Caishui [2009] No. 167 established a 15% cost verification rule, originally intended to address the difficulties in obtaining cost documentation for early shareholders and the challenges in tax collection evidence gathering, thereby improving collection efficiency. However, in long-term practice, this rule led to tax inequity: some shareholders whose actual costs were far lower than the 15% verification ratio voluntarily chose to apply the verification policy and did not declare their actual costs, artificially reducing their tax burden, resulting in a loss of state tax revenue and a lack of tax fairness and precision.

III. Tax Burden Comparison Under Old and New Policies

Scenario 1: Comparison of Tax Burden on Transfer of Bonus Shares and Stock Dividends After the Lock-up Period

Assume an individual shareholder holds 1 million restricted shares of a listed company, with a total cost of RMB 10 million. After the lock-up period, the company implements a 10-for-10 high stock dividend plan, and the shareholder's holdings become 2 million shares. Subsequently, the shareholder transfers all 2 million shares at a price of RMB 20 per share.

Before the implementation of Announcement No. 26: The 1 million bonus shares and stock dividends derived after the lock-up period are not included in the taxable scope. Only the original 1 million restricted shares are subject to tax. According to Document Caishui [2010] No. 70, in the case of bonus shares and stock dividends occurring after the lock-up period, no adjustment is made to the cost original value of the restricted shares. Therefore, the cost original value of the original 1 million restricted shares is still calculated at RMB 10 million. The taxable income is: 1 million × 20-10 million = RMB 10 million, and the tax payable is RMB 2 million.

After the implementation of Announcement No. 26: The 1 million bonus shares and stock dividends derived after the lock-up period are included in the taxable scope. All 2 million shares are subject to tax. According to Announcement No. 26, the total cost of RMB 10 million is averaged over the number of shares held, resulting in a cost of RMB 5 per share. The taxable income is: 2 million × (20-5) = RMB 30 million, and the tax payable is RMB 6 million. The difference in tax between the old and new policies is RMB 4 million, representing a significant increase in tax burden.

Scenario 2: Comparison of Tax Burden After the Abolition of the 15% Cost Verification Rule

Assume an individual shareholder holds 1 million restricted shares and is unable to provide compliant cost original value documentation. The shares are all transferred at a price of RMB 20 per share.

Before the implementation of Announcement No. 26: The cost original value and reasonable taxes and fees are deemed at 15% of the transfer proceeds. The taxable income is: 1 million × 20 × (1 - 15%) = RMB 17 million, and the tax payable is RMB 3.4 million.

After the implementation of Announcement No. 26: The tax is calculated based on the full amount of the transfer proceeds. The taxable income is: 1 million × 20 = RMB 20 million, and the tax payable is RMB 4 million. By abolishing the verification rule, the new regulation forces taxpayers to retain and declare actual documentation, eliminating the selective application of policies to avoid tax and achieving tax fairness.

IV. Impact of the New Regulations on Relevant Parties

For individual restricted shareholders, Announcement No. 26 expands the taxable scope, and the tax burden arising from the transfer of restricted shares will increase. The Announcement includes bonus shares and stock dividends derived after the lock-up period within the taxable scope, clarifying that individuals transferring restricted shares formed due to stock dividends or stock splits by listed companies must pay individual income tax as required. The Announcement also abolishes the 15% cost verification method, replacing it with the confirmation of actual cost original value. For situations where, after the implementation of the Announcement, a listed company applying for initial share registration fails to declare the cost original value of restricted shares as required, individual income tax will be provisionally withheld based on the full amount of the transfer proceeds. This further requires shareholders to properly retain original cost documents such as share subscription agreements and capital contribution certificates, standardizing the management of cost original value documentation for restricted shares. Additionally, the obligation for individual shareholders to file settlement declarations for restricted share transfers has been strengthened. The Announcement explicitly requires that a settlement declaration be filed by June 30 of the following year. Failure to file or to file accurately on time will directly affect the right to tax refunds, making the self-declaration obligation a mandatory requirement rather than an optional one.

Announcement No. 26 explicitly requires that when applying for initial share registration, individual shareholders must declare the cost original value of restricted shares and submit a verification report issued by an intermediary agency (accounting firm or tax agent firm). This imposes higher compliance management requirements on companies planning to go public. The impact is particularly significant for companies with equity incentive plans, employee stock ownership platforms, or similar shareholding structures. At the same time, the information disclosure obligations of listed companies have been strengthened. Listed companies need to pay more attention to tax-related requirements when disclosing information about restricted share transfers and, where necessary, assist individual shareholders in completing the confirmation and declaration of cost original values. For shareholder reduction information disclosed in periodic reports, the tax compliance status of such reductions should also be monitored concurrently. Finally, equity incentive plans need to be re-evaluated. For companies planning to go public, existing equity incentive plans may involve restricted share arrangements. After the company goes public, the tax calculation for incentive recipients transferring restricted shares will undergo significant adjustments under the new policy. Companies need to re-examine the design of their equity incentive plans to strike a balance between incentive effects and tax costs.

V. Tax Compliance Management Recommendations for Relevant Parties

For individual restricted shareholders, it is important to accurately understand the relationship between provisional withholding and settlement declarations, and to thoroughly organize and properly retain documentation of the cost original value of restricted shares. This includes share subscription agreements, capital contribution certificates, and other documents before the initial public offering, to ensure that complete cost original value evidence can be provided promptly during settlement, avoiding full taxation due to the inability to provide cost original value. Secondly, carefully plan the timing of stock dividends, stock splits, and share reductions, and fully assess the tax implications of stock dividends and splits. For restricted shareholders planning to reduce their holdings, reasonably plan the timing and pace of reductions in light of the specific requirements of the new regulations, avoiding concentrated tax burdens from simultaneous large-scale reductions.

For listed companies and companies planning to go public, standardize the cost original value declaration process for shareholders during the initial public offering phase, assist shareholders in completing the confirmation of restricted share cost original values and the issuance of verification reports, and ensure that declaration materials comply with the requirements of the new regulations. For companies with complex equity structures or a large number of shareholders, it is recommended that the cost declaration work be appropriately advanced. Additionally, optimize equity incentive and shareholding structures. Adjust incentive plans in light of the new requirements to balance employee tax burdens with incentive effects. Furthermore, establish a regular tax-related control mechanism. Conduct regular tax risk assessments of existing restricted shares and shareholder reduction activities, standardize information disclosure and supporting services, and prevent tax-related risks.